Direct Tax Laws & International Taxation · Transfer Pricing

Reference to Transfer Pricing Officer under Section 166

Updated 5 October 2026 · Fact-checked

Under section 166, the Assessing Officer, with the approval of the Principal Commissioner or Commissioner, can refer an international or specified domestic transaction to the Transfer Pricing Officer. The TPO hears the assessee, determines the arm's length price by order, and the Assessing Officer then computes total income in line with that order.

Understand Reference to Transfer Pricing Officer under Section 166

Transfer pricing rules say that a transaction between associated enterprises must be priced as if the parties were independent. That price is the arm's length price (ALP). Fixing the ALP needs benchmarking, comparables and industry knowledge. A general Assessing Officer (AO) may not have that expertise.

So the law creates a specialist, the Transfer Pricing Officer (TPO). Section 166 is the bridge between the AO and the TPO. It covers the case where the AO is assessing a person who has entered into an international transaction or a specified domestic transaction.

The AO does not refer every case automatically. The AO refers a transaction when he considers it necessary or expedient, and he needs the prior approval of the Principal Commissioner or Commissioner. This approval is a safeguard. A reference made without it is open to challenge.

After the reference, the TPO takes over the ALP question only. He gives the assessee notice and an opportunity of being heard. He may ask for evidence, including the transfer pricing documentation. He then determines the ALP by a written order and sends it to the AO and the assessee. The AO must compute the total income in conformity with that ALP. The TPO does not assess the whole income.

Income from the transaction is computed on the ALP determined by the TPO. The ALP takes the place of the price actually charged or paid. The assessee cannot claim a lower income or a higher loss because of this substitution. In a numerical question, state the ALP, compare it with the transaction price, and then compute total income on the ALP.

The TPO's order is not separately appealable. It is challenged in one of two ways, as applicable. Where the AO passes a draft assessment order, the assessee can file objections before the Dispute Resolution Panel within the prescribed time. Otherwise, the assessee appeals to the CIT(Appeals) against the final assessment order. The AO must forward a draft assessment order to an eligible assessee where a TPO variation is prejudicial to its interest, and the assessee may then object before the DRP. In your answer, always separate the roles: the AO refers and computes, and the TPO determines ALP.

Key rules to remember

Who refers and on what condition: AO refers if he considers it necessary or expedient + prior approval of Principal Commissioner / Commissioner; Both parts are needed. Approval is taken before the reference, not after.
Scope of reference: International transaction or specified domestic transaction → TPO determines ALP; The TPO decides ALP only. He does not compute total income.
Procedure at TPO level: Notice → hearing and evidence → determination of ALP → order sent to AO and assessee; Natural justice is part of the procedure. The assessee must get a chance to be heard.
Effect on AO: Total income = computed in conformity with the TPO's ALP; The AO is bound to follow the TPO's ALP. The AO cannot substitute his own ALP.
Income on ALP: Income from the transaction is computed on the ALP determined by the TPO, in place of the transaction price; The assessee cannot claim a lower income or a higher loss from the substitution. For example, if a sale is priced below the ALP, income is computed at the ALP, so it rises by ALP − price charged.
Time limit: TPO order must be passed within the prescribed period linked to the AO's time limit for assessment; Check the exact period in the bare Act or ICAI material before the exam. Remember that it is tied to the AO's limitation.

How to solve Reference to Transfer Pricing Officer under Section 166 questions

Use this order for any question on reference to the TPO. It keeps your answer in provision-facts-conclusion form.

1Identify the transaction. Is it an international transaction or a specified domestic transaction? Check that the parties are associated enterprises or that the specified domestic transaction conditions are met.
2State the trigger. The AO is assessing the person and considers a reference necessary or expedient.
3Check the approval. Say whether the prior approval of the Principal Commissioner or Commissioner was obtained. If not, the reference is defective.
4Describe the TPO's work: notice, hearing, evidence, application of the most appropriate method, and a written order determining ALP.
5Apply the facts. Compare the transaction price with the ALP. Compute the income from the transaction on the ALP in place of the price actually charged or paid. The assessee cannot claim a lower income or a higher loss from this substitution.
6Show the effect on the AO: total income is computed in conformity with the ALP in the TPO's order.
7Conclude with the assessee's remedy. The TPO's order is not separately appealable. It is challenged through objections before the Dispute Resolution Panel against the draft assessment order, or by appeal to the CIT(Appeals) against the final assessment order, as applicable.

Quickest way: Four-line answer for a section 166 question

When to use it: Use this for short theory questions or when a case scenario MCQ asks who does what in a reference.

Line 1: AO may refer, if necessary or expedient, with prior approval of the Principal Commissioner or Commissioner.
Line 2: TPO gives notice, hears the assessee, takes evidence and determines ALP by order.
Line 3: AO computes total income in conformity with the ALP.
Line 4: Apply the numbers: income is computed on the ALP in place of the transaction price. The assessee cannot claim a lower income or a higher loss from the substitution.

Common mistakes in Reference to Transfer Pricing Officer under Section 166

Saying the TPO computes the total income of the assessee.
Students think the TPO takes over the whole assessment once the reference is made.
Fix: Write that the TPO only determines the ALP. The AO computes total income following that ALP.
Ignoring the approval requirement.
The case facts often just say the AO referred the matter, and students move to the ALP.
Fix: Always check whether prior approval of the Principal Commissioner or Commissioner is mentioned. If the facts are silent, say that approval is required.
Treating the reference as mandatory in every transfer pricing case.
Students mix up the existence of international transactions with a duty to refer.
Fix: Use the words 'necessary or expedient'. The AO exercises judgment based on the facts.
Letting the TPO decide without giving the assessee a hearing.
Students focus on the technical benchmarking and forget natural justice.
Fix: Include notice, opportunity of being heard and evidence in the TPO procedure.
Using the ALP to claim a lower income or a higher loss, or computing income on the price instead of the ALP.
Students apply a mechanical subtraction formula and forget that the law substitutes the ALP for the transaction price.
Fix: Write that income is computed on the ALP determined by the TPO. Add that the assessee cannot claim a lower income or a higher loss from the substitution.
Writing that the assessee can appeal directly against the TPO's order.
Students assume every order is separately appealable.
Fix: State that the TPO's order is not separately appealable. It is challenged through objections before the Dispute Resolution Panel against the draft assessment order, or by appeal to the CIT(Appeals) against the final assessment order, as applicable.

Worked examples

Example 1

Zeta Ltd, an Indian company, sold goods to its foreign parent, Zeta Inc., during the tax year. The AO, while assessing Zeta Ltd, believes that the price may not be at arm's length. He wants to send the matter to the TPO without taking any approval from his superior. Advise whether the reference is valid and describe what happens next if it is made properly.

Show the solution

Provision: Under section 166, the AO may refer an international or specified domestic transaction to the TPO if he considers it necessary or expedient, with the prior approval of the Principal Commissioner or Commissioner.
Facts: The sale to the foreign parent is an international transaction between associated enterprises. The AO has a doubt about the pricing, but has not taken approval.
Conclusion on validity: The reference would be defective without the prior approval. The AO must first obtain the approval of the Principal Commissioner or Commissioner.
Next steps after a proper reference: The TPO gives notice to Zeta Ltd, hears it, calls for evidence and documentation, applies the most appropriate method and passes a written order determining the ALP.
Effect: The TPO sends the order to the AO and to Zeta Ltd. The AO computes total income in conformity with the ALP.

Answer: The reference is not valid without prior approval of the Principal Commissioner or Commissioner. Once approval is taken and the reference is made, the TPO determines the ALP after hearing Zeta Ltd. The AO then computes total income in line with that ALP.

Example 2

Rhea Ltd exported goods to its associated enterprise in a foreign country at a price of ₹4,80,00,000. The AO referred the transaction to the TPO with proper approval. After a hearing, the TPO determined the ALP at ₹5,40,00,000. Rhea Ltd had declared total income of ₹2,10,00,000, and no other adjustment is needed. Compute the total income the AO must assess, and state who makes each decision.

Show the solution

The TPO determines ALP, so ALP = ₹5,40,00,000.
The transaction is an export sale, so the price charged is a receipt. The price charged (₹4,80,00,000) is lower than the ALP (₹5,40,00,000), so an adjustment applies.
Adjustment = ALP − price charged = ₹5,40,00,000 − ₹4,80,00,000 = ₹60,00,000.
The adjustment increases income, so it is added to the returned income.
Total income = ₹2,10,00,000 + ₹60,00,000 = ₹2,70,00,000.
Roles: The AO made the reference and computes the final total income. The TPO determined the ALP only.

Answer: The AO must assess total income of ₹2,70,00,000, after adding the ₹60,00,000 adjustment based on the TPO's ALP. The TPO fixed the ALP, and the AO computed the total income in conformity with it.

Exam tips

Write the roles in one sentence: AO refers and computes, TPO determines ALP. Marks are often lost by mixing them.
Always mention prior approval of the Principal Commissioner or Commissioner. Case scenarios often hide this fact.
In numerical questions, state the ALP first, compare it with the price, then give the adjustment and its direction, then the revised total income.
Mention the hearing given by the TPO. It shows you know the procedure and the natural justice element.
Check the exact time limit and any recent changes from the Income-tax Act, 2025 text and ICAI material before the exam. Do not quote a period you cannot confirm.

Practice questions from Transfer Pricing

Reference to Transfer Pricing Officer under Section 166 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Reference to Transfer Pricing Officer under Section 166: frequently asked questions

What does section 166 of the Income-tax Act, 2025 deal with?

It deals with the reference of an international or specified domestic transaction by the Assessing Officer to the Transfer Pricing Officer. The TPO then determines the arm's length price. The AO computes total income in line with that price.

Does the Assessing Officer need approval to refer a case to the TPO?

Yes. The AO needs the prior approval of the Principal Commissioner or Commissioner. He also refers only when he considers it necessary or expedient.

What can the TPO do after receiving the reference?

The TPO gives the assessee notice and a hearing, and may call for evidence and documents. He determines the ALP by a written order. He does not assess the full income.

Can the assessee appeal directly against the TPO's order?

No. The TPO's order is not separately appealable. The assessee challenges it through objections before the Dispute Resolution Panel against the AO's draft assessment order, or by appeal to the CIT(Appeals) against the final assessment order, as applicable. Check the current provisions for the time limits.